Earnings set to continue playing catch-up in coming months

RF warns pace of recovery will be hard to maintain once inflation starts to rise from its historic low

Real earnings are set to continue playing ‘catch-up’ in the short-term, with pay expected to maintain its recent growth rate, but there are doubts about how long this can continue, according to the Resolution Foundation’s latest pay projection published today (Sunday).

The analysis, which forecasts short-term trends in regular (non-bonus) pay ahead of official figures published later this week, predicts that average weekly earnings grew by between 2.7 and 2.8 per cent in the three months to July. This is broadly in line with the figure of 2.8 per cent recorded in April, May and June – the joint fastest level of real pay growth in eight years, and above the pre-crash trend of 2.2 per cent.

The current rate of real wage growth, which is primarily due to inflation being at an historic low, is helping to make up some of the ground lost over the course of the recent six-year pay squeeze. Average pay will return to pre-crash levels in mid-2017 should this growth rate persist.

However the Foundation notes that maintaining the current pace of real wage recovery will be difficult as prices start rising again. It points to the recent Bank of England Inflation Report, which forecast wage growth to remain relatively stable over the remainder of the year, with a return to the pre-crash trend by the end of 2016. The Bank expects modest increases in nominal pay growth to be offset by a pick-up in inflation from its current 0 per cent level.

The Foundation also highlights that even if the current rate of growth continued then pre-crash average wage levels wouldn’t be reached until mid-2017 – meaning a decade of lost pay growth. It adds that it will take longer before the typical (median) wage recovers.

With average earnings still over £110 a week below where they would have been if pre-crisis trends had continued uninterrupted, the Foundation warns that the UK may never recover the ground lost during its six-year pay squeeze.

And while long-term prospects for stronger wage growth ultimately depend on rising productivity, RF research to be published tomorrow will find that a gap has opened up between pay and output  growth over the last 30 years – a process that has accelerated in the last decade.

The report will show that while growing wage inequality initially drove this ‘decoupling’ of pay and productivity growth in the 80s and early 90s, a growing share of employee compensation going to pensions and NI contributions rather than wages has driven it over the last decade. The Foundation says that getting typical wage growth back on trend will therefore require a combination of faster productivity growth and changes in the distribution of employee rewards.

Matthew Whittaker, Chief Economist at the Resolution Foundation, said:

“Britain’s pay recovery has settled in at a healthy 2.8 per cent, helped along by historically low inflation.

“After six years of falling real pay, this period of catch-up growth is very welcome for workers. But it may prove short lived once inflation picks up. Even in the optimistic scenario in which wage growth remains above-trend, it will be 2017 before the pre-crisis average pay level is restored – a decade of lost growth.

“Prospects for stronger wage growth will ultimately rest on getting to grips with Britain’s poor productivity record, and ensuring that these improvements find their way into pay packets.”

Notes

The Bank of England reported last month that it expects average earnings growth (including bonuses) to stand at 2.7 per cent in real terms in the final quarter of 2015. It is then projected to fall back to 2.2 per cent over the course of 2016.

A briefing note explaining the methodology behind the Resolution Foundation’s pay projection is available here.